Monday, January 14, 2013

Britain’s Conservative Economic Policy of Austerity Is a Roaring Success – At Possibly Pushing Britain Into Its Third Recession

Maybe Conservatives Believe That is the Definition of Success

When British Conservatives took over the government in 2010 in the aftermath of a recession they implemented a policy of austerity designed to reduce budget deficits.  This policy, they argued would so greatly restore confidence in the British economy that consumers would rush to spend and businesses would rush to invest and hire.  The actual result was that Britain slid into a second recession.

But employment in Britain did remain strong, and the Conservatives stuck to their policy even though other economic indicators were terrible.  Now the country is facing the possibility of the third recession, this one if it occurs resulting totally from the implementation of Conservative policy.

The Markit/CIPS services Purchasing Managers' Index (PMI) for services, which makes up three-quarters of the UK economy, dropped to 48.9 in December - its lowest reading since April 2009 - from 50.2 in November, confounding economists' forecasts for a small rise, according to the data released on Friday.
Markit said the figures, combined with
mixed manufacturing and construction figures earlier this week, mean the Britain posted its worst quarterly performance for three-and-a-half years, and suggest the economy contracted by 0.2pc in the last quarter of 2012.

"The first fall in service sector activity for two years raises the likelihood that the UK economy is sliding back into recession," said Chris Williamson, chief economist at survey compilers Markit.

"The services PMI follows an equally disappointing construction survey for December, leaving manufacturing – which accounts for just 10pc of the economy – as the only bright spot."

A survey is not economic data, and it may be that the British economy will not enter a recession, again.  But the data does not suggest any success of the policy.  And what about investors and interest rates.  British government borrowing costs on 10 year bonds are now slightly greater than France’s, and France is hardly the paragon of fiscal virtue.

The yield of the UK’s benchmark 10-year gilt rose 5 basis points to 2.118 per cent on Friday morning in London, marginally higher than the 2.116 per cent yield on 10-year French bonds at the time.

As for future policy, expect more of the same.  Conservatives never ever admit they were wrong, no matter how much the economy suffers.  And after all, sometime between now and the year 2050 the economy may have strong growth, at which time Conservatives will crow that their policy was vindicated.

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